Guernsey has elected a new States (parliament). I was asked by a number of people to comment before the elections on the issues that I thought would face that body when it assembled, but rather than comment before the election and so face accusation of interfering I do so now when votes have been cast but before the new members assemble.

Guernsey is facing a very difficult future. Put simply, Guernsey decided a long time ago to become a tax haven. Tourism and tomatoes were not, in the opinion of its politicians, going to provide its population with the level of income they wished for and that was available in nearby states, such as France and the UK. So it sold the main asset it had to offer, which is the fact that it can create its own laws. This advantage it used to create an environment where no tax was paid by non-residents using its facilities and it went out of its way to provide the secrecy those using those services needed to ensure they could not be discovered to be doing so. It's this combination of lo tax and secrecy that made it a tax haven.

Such action is, of course, tantamount to declaring economic warfare on the states that suffer taxation loss as a result. Unsurprisingly, they were going to eventually engage in battle to recover their losses. Although it was the OECD who entered the fray first as far as Guernsey is concerned it is the EU that has had by far the greatest impact on its tax haven activities. That is because Guernsey has accepted that the UK has the right to require it to comply with the EU Code of Conduct on Business Taxation and the EU Savings Tax Directive.

The first of these had one key objective, which was to ensure that any tax rate that a haven offered had to be available to local people as well as those not resident. It was probably the case that the EU thought Guernsey would as a result change its tax rate to 20% for everyone, but if that was the case they failed to take the Isle of Man's peculiar situation into account. The Isle of Man enjoys more than £200 million of tax subsidy from the UK each year, and as a result has to raise little in tax from companies. It took the initiative under the EU Code of Conduct and announced that it was to offer a zero per cent tax rate on company profits. Jersey and Guernsey had little option but follow suit. In fairness to Guernsey, it's the only one of the three to do so honestly in that the scheme it is offering genuinely complies with the EU's requirements. The Isle of Man has already been shown to be trying to abuse the rules, and its scheme has been rejected. I expect that Jersey's will also be rejected later this year.

This move to a zero per cent tax on corporate profits, except for a 10% charge on banks and other financial institutions, has created enormous problems for Guernsey. First of all, it has created what has been called a 'black hole' in the States income. Put simply, company taxation made up £114 million of its total annual income of £350 million in 2007. In 2008, after the introduction of the zero per cent tax for most companies this is expected to fall to £38 million - a drop of some £76 million in a year.

No state can readily manage a drop in its income of £76 million in a year, and of course Guernsey is not going to do so. Increases in social security contributions and other taxes will make up part of the deficit, clawing back a total of at least £30 million, but the fall in income will be at least £45 million, and even after cutting expenditure in 2008 there will be deficit. Press reports suggest that is expected to increase in subsequent years to nearly £30 million a year. The States has reserves of less than £250 million.

That leaves the States with a continuing deficit that they hope to make good from two sources. The first is cuts in States expenditure, about which they are optimistic but which governments the world over find hard to deliver. The second is to assume there will be substantial economic growth. That, they think, will arise from the zero per cent corporation tax policy.

This is naive. The same policy is on offer from Jersey and the Isle of Man. It's also been available fro some time from many tax havens. There is no reason to suppose it will increase total tax haven activity, and nor does it give Guernsey a comparative advantage. It just means Guernsey will get less from whoever is using the services Guernsey has to offer in future.

There are other reason why any assumption of growth is naive. The EU STD has been shown to work: disclosure is taking place and less money is now flowing to the places covered by the scheme. The likelihood of the EU STD's scope being increased are high in the wake of the Liechtenstein affair, so closing many of the remaining opportunities for evasion that places like Guernsey supply. And the withholding rate of tax under the EU STD is increasing this year: the attraction of Guernsey to the tax evader is falling.

For legitimate business it is much the same. Offshore finance is suffering as a result of the credit crunch and all that follows from it. Much of the credit crisis is the result of offshore; it's hardly surprising that the attraction of offshore deals is at a low ebb right now.

And the publicity given to companies that do such deals is high. They're not the sort of thing you do to prove your corporate responsibility at present. The flow of funds is going to decline, not increase.

The omens for Guernsey's stability, let alone growth are, therefore bad. The prospect that it will not fill any 'black hole' from growth are high.

It has a new government. It ha enough reserves to see that government through its life. There's no guarantee it has enough funds to see its government through the next decade though. During the tenure of the currently elected members this is likely to become obvious. The charade that is being played out that all is well is superficial, Guernsey's crisis is waiting to happen as surely as the credit crunch was a shadow in the wings for some time before it happened.

In that case the question everyone in Guernsey needs to be asking of their newly elected politicians is a simple one. It is "How are you going to save us from economic disaster?"